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Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

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All investing is subject to risk, including possible loss of principal.

You probably know that Vanguard advocates periodic rebalancing as a way to manage risk in investment portfolios.

Our Investment Counseling & Research Group, overseen by my fellow blogger John Ameriks, has written a detailed white paper on rebalancing. John weighed in as part of a post discussing whether buy-and-hold investing is a dead idea. And we’ve written numerous other articles and blog posts on the topic of rebalancing.

Vanguard’s research suggests that it’s sensible for you to rebalance your portfolio to its target asset allocation annually, semiannually, or when the percentage allocated to a given asset class (cash, bonds, or stocks, for example) is more than 5 percentage points off your target.

I just finished a rebalancing exercise because I use my birthday in late August as a trigger for checking out the portfolio and doing any rejiggering made necessary by the market’s movements or by accumulated cash.

Anyway, this got me to wondering what triggers other investors to rebalance—assuming, of course, that you regularly do so.

Like this:

Craig Stock

Craig Stock heads Vanguard's Corporate Marketing and Communications department, responsible for delivering investor information and education in Vanguard’s "plain talk" style.
Before joining Vanguard in 1995, Craig spent two decades in journalism. At The Philadelphia Inquirer, he reported on business and the economy, served as a business editor, and wrote a column on personal finance.
Craig holds a B.S. from the University of Kansas, and was a Sloan Fellow in Economics Journalism at Princeton University's Woodrow Wilson School. He’s also the author of Investing During Retirement, published in 1997.

Comments

Anonymous | September 15, 2009 6:26 pm

We try to re-balance in Dec. if it’s needed. Last Dec. our 60% stock, 40% bonds and cash desired allocation was actually more like 52% stocks and 48% bonds and cash; so with the market being cheap, we did some reallocation by selling bonds and buying stock mutual funds, which brought the stock allocation up to about 56%. With the market being so volatile, we held some cash in reserve, and when the market dove again in March, we bought more stock mutual funds and brought our stock allocation up to the desired 60% of total assets. With the market rebounding since March, our stock portion is now 66% and it’s time to sell some stock mutual funds and put the proceeds into bond and money market funds to bring them up to 40%. We’ll do it before the end of the year, probably Dec.

Anonymous | September 14, 2009 8:14 pm

I normally rebalance at the end of the year: November, December, but the market was so volatile in Nov-Dec of 2008 that I decided to do nothing until things calmed down. I did rebalance in July of 2009. I tend to rebalance once a year and change my holdings so that they match my target of 66% stocks and 33% bonds. I have just turned 50 years old and this percentage of asset allocation allows me to sleep at night.

Anonymous | September 14, 2009 4:25 pm

I use the late fall for reflection in stocks as well as other things. If I have losses to capture I do so before year end. If I have gains, I make my plans and execute in jan of the new year. I also look hard during big run ups and markets drops like last year. I plan to buy during the correction this fall.

Anonymous | September 12, 2009 2:40 pm

I have only been at this for about ten years, but what a ten years this has been!

When I started investing, the end of the year (Holiday break) seemed like an appropriate time to rebalance the asset allocation because it allowed the impact of annual distributions to be taken into account. Additionally, dollar-cost averaging with accumulated cash helped keep hings on track. (Instead of investing with accumulated cash in line with the target asset allocation, I have a speadsheet calculate the drift from targets each month. Then the use of accumulated cash disproportionately invested in assets below target has tended to ‘fine-tune’ the actual allocation on a frequent basis.)

But, the market movement has reeked havoc with year-end or once-a-year rebalancing! So, I have now given up on annual rebalancing, and have moved to the deviation-from-target method. Certainly this has been more effective in the last cycle (taking cash out of equities in late 2007, and putting more cash into the same over the last six months) with the value of different assets jumping or falling with irregular frequency.

Averaging in with accumulated cash has helped smooth things a bit, but until the markets calm down, it seems that the deviation-from-target approach seems suitable.

Anonymous | September 12, 2009 10:44 am

The “Market Crash” Taught me a lesson ! At my age, 75, I took too much risk. I am a “Buy & Hold’ Investor. In March of 2009, I decided to” Rebalance” my portfolio and become more conservative. To date, my Portfolio has had a 10% return. This may not seem to be very profitable, but, I’m back on track to reaching my goals. My trigger for “Re-Balancing” is not to not to go above the 4% “Withdrawal Level”. Preservation of Capital is the key to my future needs!!

Anonymous | September 12, 2009 3:20 am

I do not believe in automatic rebalancing or in any particular triggering approach. I think common sense ought to rule. Specifically, I did not rebalance in the past year as my equities declined much below target. I chose not to rebalance into the darkness of uncertainty. I belief is that the stock portion of my portfolio will rebalance itself over time. This is in line with my conservative (retirement) strategy to be risk adversive at a cost of lost opportunity.
Thanks for your blog.

Anonymous | July 10, 2012 8:00 am

Robert L. | April 21, 2013 6:47 pm

You are right with your comments about “churning”, but I still believe a conservative approach to Vanguard automatic re-balancing is a good thing. I cringe a little when I see folks talk about a 3% or 5% trigger. My idea is more like a 10% to 25% trigger. And, yes, I realize this post I’m replying to is over a year old.

Anonymous | September 11, 2009 7:43 pm

I try to use rebalancing bands… if an asset class exceeds a set range, I rebalance so I stay within my risk tolerance.

Speaking of rebalancing – why doesn’t Vanguard offer an automated way to rebalance in an IRA? Like a way for me to define that I want 20% in fund X, 10% in fund Y, etc. and then click a button to have Vanguard do the computations and requisite buying and selling?

The Federal TSP offers this functionality, and it is a very convenient management tool. If Vanguard is concerned about frequent trading to keep costs down, then limit the rebalancing tool to only function once or twice a quarter.

Anonymous | January 30, 2012 9:12 pm

This is a great idea to have Vanguard do the rebalancing for the clients per client target by pushing one button. David Swenson rebalances the Yale portfolio daily. In 1993 when the S&P index grew 1.3% for the year the Yale endowment fund with rebalancing daily earnned 8.3% that year as listed in Swensons book Uncoventional Success.Yale of course holds a non profit status but the individual can do this rebalancing frequently in a tax sheltered account with the same results. If it works for Swenson it will work for everyone else.

Anonymous | February 14, 2012 11:00 pm

I agree Vanguard should have a way to define you want 20% in fund X 50% in fund Y etc and click the button and its all figured out for you.My 401k plan has this feature and its the only reason i dont roll my assets over to my vanguard ira.

Anonymous | July 6, 2012 8:11 pm

Anonymous | September 11, 2009 6:54 pm

Here is the totally unscientific method by which we re-balance our two sector funds (they are not our main holdings): whenever they go above our original purchase amount by $1,000.00, we take the thousand out and put it into one of our core holdings. If one goes below the purchase amount by $1000.00, we take a thousand out of our core holdings to bring the sector fund back to the baseline.

We aren’t looking to get rich off this scheme, but it is very simple and has provided lots of profits over the years to help build our basic bond and stock funds.

Anonymous | May 7, 2012 3:56 pm

Anonymous | September 11, 2009 2:17 pm

I have rebalanced but not on a regular basis.

Rather it has been when I have made a major withdrawal to pay cash for real estate or other large purchase. Or when volatility in equities took my balances well off target. Or when I changed my target.

So I am not sure life will ever be so settled for me that I could rely only on a birthday reminder to consider rebalancing.

Anonymous | January 20, 2012 9:53 pm

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Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.